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1 Chart Shows Why Physical Retail Needs to Go Digital

U.S. retail sales fell in May 2017, down 0.3% compared with April. That wasn't too unexpected, but year-over-year total retail spending still increased 3.8%. The various aspects of the retail industry are a mixed bag, with segments like department stores struggling, but home improvement stores showing strength.

The big winner, though, has been online retail sales. In fact, that has been the case for a long time now. The American consumer has been resilient for the last twenty years, rebounding from two recessions and enduring numerous other crises. Over that period, various segments of retail have led the way higher and later lagged behind, but online retail sales have never once dipped into the negative on an annualized basis.

Chart by the author. Data source: U.S. Census Bureau.

The internet store to rule the world?

Those figures are startling for traditional brick-and-mortar stores, as the implication is that e-commerce is stealing market share from total retail. At the last reported rate of over 12%, online sales will double in a short six years' time and gobble up more of the total retail pie.

That doesn't mean that the traditional store is dead, though. Internet sales accounted for only 8.5% of total retail sales in the first quarter of 2017, according to the Census Bureau. The fast growth of digital merchandising has caught up, though, as store closures are on pace for the fastest rate ever this year. Amazon (NASDAQ: AMZN) has come into increased focus as the leader in the movement that is shuttering storefronts.

Does that mean that online retailers like Amazon will soon rule the retail world? I do not believe that to be the case. Chains like Wal-Mart Stores (NYSE: WMT) and Target (NYSE: TGT) have been growing their own online businesses in the double digits, too, although they are much smaller than Amazon's enterprise. Software companies like Shopify (NYSE: SHOP), which has also been enjoying double digit revenue growth, have emerged to help level the playing field and help companies establish an e-commerce presence.

Image source: Getty Images.

However, the migration to online is showing no signs of letting up. That means that players like Amazon may not grow to own the whole retail pie, but it will make it hurt for those slow to pick up on consumer trends.

A fully digital future?

The pain for brick-and-mortar stores is real, but this year's catastrophic sounding news headlines are more about the traditional segment of the industry right-sizing physical operations and reimagining the use of its real estate.

As proof that the world may not be ready for a digital-only experience devoid of human interaction is the recent move made by Amazon itself. Its recent bid for Whole Foods, in my opinion, is a signal that physical locations are evolving rather than disappearing. The future, at least the foreseeable part of it, will still require physical store formats. Wal-Mart, Target, and others should theoretically have a head start in this regard, and have been offering locations as an order pick-up hub or doubling store duties as hyper-local fulfillment centers.

However, for retailers late to the party: take heed. At the very least, it is time to reimagine your use of physical space. The internet is a disruptor, and consumers are loving it.

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